|State Pension Credit Bill [Lords]
The Minister for Pensions (Mr. Ian McCartney): I do not want to interrupt the hon. Gentleman's train of thought. However, before he gets too despairing, it was the Government that set up the Pension Provision Group. We are not afraid of debate, of looking for alternatives or of developing blue-sky policies. The hon. Gentleman would not have had the report if the Government had not established the group.
Mr. Webb: It is to the Government's credit to set up a group if they are prepared to listen to its conclusions. If they entirely ignore its conclusions, I am not sure that that is to their credit; in fact one could argue that the money should not have been spent on it.
I should like to expand on a point made by the hon. Member for Hertsmere about the two kinds of self-employment. Traditionally, the assumption has been that pension provision is less of an issue for the self-employed person with a business that will provide their pension—although that might not turn out well—or who can make their own private provision. However, the new self-employed might not have a business with assets; if they move between employment and self-employment, treating them as a group distinct from employees is a less tenable position than ever. As the hon. Gentleman suggests, crediting them into the state second pension, thereby encouraging them to save, would be a good thing to do.
I differ from the hon. Member for Hertsmere in what that should imply for the national insurance contributions made by the self-employed. When we compare them with the employed, we tend to forget the national insurance contributions of employers; the combined contribution represents a 20 per cent. rate per worker, whereas a self-employed person currently only pays 7 per cent. plus the class 2 contribution. The Treasury has estimated that the gap between the benefits received by the self-employed in retirement pension and the contributions that they make is substantial; possibly as much as £2 billion.
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This might sound odd, and not very pro-business, but in some ways the self-employed have historically under-paid national insurance relative to the benefits that they get from the system. Although they receive less than employees, they do not receive much less—essentially sickness benefits—but they pay less than half the amount of national insurance; so they actually get a substantial subsidy. If they were to be brought into the state second pension, there would be a case for looking at whether there should be a compensating rise in national insurance.
Mr. Clappison: I agree with the hon. Gentleman that we need to look at the whole issue. However, does he not agree that while that might have been the case in the past, the gap between what the self-employed pay in national insurance contributions and what employed people pay, not taking into account the employers' contribution, is closing?
Mr. Webb: Only to a point, in that I do not disregard the employer. Clearly an individual makes a choice to become an employee with an employer who effectively knocks the 10 per cent. off his wages. In a sense, the employee is paying the combined amount, so there might be some convergence. However, I would still argue that the difference between 7 per cent. class 4 and 20 per cent. class 1 in terms of employee plus employer is hugely relative to the difference in benefit. While I agree that the state second pension should be the province of the self-employed, there might need to be an offsetting national insurance rise. However, the new clause is quite proper. It is important that the Government respond to concerns about the pension position of the self-employed and I welcome the opportunity to debate it this afternoon.
Andrew Selous (South-West Bedfordshire): I support the new clause. My hon. Friend the Member for Hertsmere has given a good summary of the findings of the Select Committee so I shall not tire the Committee by repeating them.
The Budget that was presented last week in the House was promoted on the two themes of fairness and enterprise. We know that the Government intend all pensioners to benefit from these provisions, so it is curious that some 1.4 million people will not have as full a benefit as they possibly might receive under the Bill. In terms of enterprise, we know that it is self-employed people who form the small businesses that go on to become larger businesses and create the wealth of the nation.
Work patterns are changing, as has been said. The Government have pushed out the boundaries of those who will be covered by S2P, and those within S2P are not just those who were formerly within SERPS; there has been some change. Given that the Government have looked at the area afresh and that this is a major revisiting of pensions legislation, I have to register a note of disappointment that an opportunity has been missed. Because of the 1.4 million people who will not be brought within S2P and who will gain significantly less benefit from the savings credit part of S2P, I commend the clause to the Committee.
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Patrick Mercer (Newark): I support new clause 4, particularly as a veteran of the forgotten army of the self-employed. Having been a member at one stage, I know the difficulties; I am only pleased that I am no longer one and am back in Her Majesty's employment. It is a delight so to be.
I should like to draw attention to the report proposed in the new clause. It would set out ways in which the self-employed can be monitored. The measures would allow for the monitoring of the effectiveness of pension credit in providing support to those who have been self-employed throughout their working lives. Should it prove to be ineffective in supporting such people, it would offer a signal as to the need for reappraisal.
As we have already heard from my hon. Friend the Member for Hertsmere—in a much more eloquent way than I can put it—self-employment expanded rapidly during the 1980s. In 1981, the total number of people who were self-employed was about 2 million; roughly 8 per cent. of those in employment. By 1991, the total had risen to 3.4 million, 13 per cent. of those in employment. During the 1990s, that expansion slowed, so that in 1999 3.2 million, 12 per cent. of those in employment, were self-employed. Experience of self-employment in the UK has become much more widespread over the last 20 years.
One implication of that development is that self-employment now represents a more significant factor in the provision people need to make for retirement. I believe that the new clause would allow that to be monitored in detail. A study by Knight and Mackay was cited by the Pension Provision Group in its recent report on pension provision for the self-employed. It estimated how significant the impact of changing patterns of employment would be on men and women reaching retirement age in the next 15 to 20 years. It suggested that at least 28 per cent. of men aged between 40 and 49 in 1994-95 will have spent some time in self-employment by the time they retire—I am one of those—compared with 20 per cent. of men who are now at about state pension age.
The significance of those figures is realised when examined in the context of patterns of pension provision, particularly the levels of pension developed by the self-employed. In 1998, the Pension Provision Group found that one in 10 self-employed people had a personal pension to which contributions had been made in the past but which were no longer being made, but that some 40 per cent. of self-employed people had never had a personal pension.
The group also suggested that there were indications that a number of self-employed people may be failing to build up a qualifying record for the basic state pension each year. Although some of those people may overlap with the, approximately, half of self-employed people who are not building up rights to a second-tier pension, the group concluded that it seemed reasonable to assume that a significant minority of self-employed people do not build up any pension entitlement in a given year.
Under the pension credit provisions, second-tier pension provision in the form of the state second
Column Number: 263pension will attract a savings credit. However, according to the Pension Provision Group, the effect of that will
The group suggests that a small proportion of self-employed people will be able to fund their retirement by selling business assets or through other savings. For many, however, that option will simply not be feasible, and the result will be an increased risk of poverty in old age.
I believe that the provisions of new clause 4 will allow us to monitor that. It may serve as a useful signal as to whether pension credit is being effective for the self-employed.
Mr. Julian Brazier (Canterbury): I congratulate my hon. Friend the Member for Hertsmere on initiating an excellent debate and my hon. Friends the Members for South-West Bedfordshire (Andrew Selous) and for Newark (Patrick Mercer) on their contributions. The hon. Member for Northavon (Mr. Webb), the Liberal Democrat spokesman, contributed to an interesting exchange.
I should declare an interest, in that my wife works part-time in a self-employed capacity.
I shall take as my starting point the interchange between the hon. Member for Northavon and my hon. Friend the Member for Hertsmere, because it seemed to go to the heart of an increasingly complicated and important debate. The question is how do we compare chalk and cheese; that is, the individual self-employed person's national insurance rate, which now stands at 7 per cent., and the rate paid by the employee, who contributes a little more, at 10 per cent., but whose employer also makes a large contribution.
In thinking about why we need to study the matter carefully, as suggested in the new clause, by producing figures regularly, I believe that we can look at the question in a slightly different way. Every year, the incentives increase for companies to shed employees and replace them with self-employed full-time or part-time consultants. Indeed, that is what happened to my wife. She now works for only two days a week; she is self-employed, and replaces a full-time former employee. For the sake of any feminists sitting on the Government Benches, she is replacing a man. [Interruption.] I heard the Minister's sedentary interruption; I shall not comment on it. [Interruption.] I feel provoked, Mr. Atkinson, but I shall merely observe that my wife sells far more business each month than the full-time chap that she has replaced.
A slightly different way of looking at the comparison is this. The incentives to replace full-time employees in that way are increasing. Every time the employers' national insurance contribution rate rises, it increases the incentive not to employ people and to find self-employed people instead. Every time a fresh piece of labour legislation is introduced that provides
Column Number: 264extra rights for workers, another disincentive is created. Every time—
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